There are two main pricing strategies for consumer products. The first, called skim pricing, consists of pricing a product very high, limiting the market for that product to only those who really, really want it. The other, called penetration pricing, involves setting a low price (frequently below initial variable costs) to quickly grow volume and share and proceed down the experience curve.
For internet products and services, penetration pricing has been the norm. In fact, the most frequently-used pricing for internet products and services has been a particular variant of the penetration-pricing approach: free.
Skim pricing has traditionally been used for luxury goods, like clothes, cars, boats, etc. The high price of these items confers exclusivity and cachet to those who buy them. There was a tradition of skim pricing in earlier-generation tech products (remember $10,000 plasma televisions? Did you buy one? I didn’t think so.) Once the manufacturing costs for those products dropped, so did the pricing.
A related strategy is to foster adoption of new products by subsidizing them through a related service. Mobile phones in the US have been sold this way for a generation.
Amazon has chosen a skim pricing strategy for the Kindle, and it doesn’t appear that they are planning to lower it anytime in the forseeable future. The Kindle 2 costs $349 (no discounts) and the Kindle DX (announced yesterday) is a whopping $499.
Some of the press coverage yesterday focused on the possible payback for the DX through buying lower-priced books. But this isn’t Amazon’s strategy at all. Instead, they are targeting a small segment–heavy readers–who are price insensitive, and who are likely to buy lots of e-books to fill their Kindles. For them, price is no object if they can carry 50 books in their purse. (This excellent post from the New York Times’ Saul Hansell discusses Amazon’s focus on hard-core readers.)
So, Amazon has returned to a tried and true marketing strategy: create a product that serves a need of a small, price-insensitive segment, and price it to capture much of the value created. They are saying this–the Kindle is not for everyone–and profiting by it.
- Scott Anthony discusses the Kindle from an innovation perspective in his Harvard Business blog.)
- From Customers are Talking: I like the Kindle
(Photo: the Kindle DX, available at your local Amazon retailer)